In today's complex macroeconomic and geopolitical environment, deal makers face a multitude of factors that can significantly impact the evaluation of an acquisition. Inflationary pressures, supply chain disruptions, and other variables introduce commercial, operational, and financial challenges that must be carefully considered. While a quality-of-earnings analysis can address the impact of these challenges on profitability and cash flow, it is crucial to also assess how these factors affect the "normal" level of working capital. This evaluation is essential for setting the peg at closing and gaining a comprehensive understanding of the operational needs of the business.

To navigate uncertainties related to working capital adjustments at closing, creative solutions such as working capital "collars" or adjustment caps can be implemented. These mechanisms help mitigate the risk of significant working capital adjustments by establishing predetermined thresholds. However, it is imperative to conduct thorough due diligence to comprehend the underlying drivers, volatility, and ongoing requirements that may influence working capital levels in the future.

By proactively addressing these challenges and implementing strategic solutions, deal makers can enhance their ability to navigate the complexities of acquisitions in today's dynamic business landscape. Strategic planning, meticulous due diligence, and innovative approaches to working capital management are key components in ensuring successful transactions amidst evolving economic and geopolitical conditions.

April 5, 2024